Is the Catalan financial deal with Spain unfair?

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Basque financial deal dates back to 1200

Jordi Pujol preferred not to demand a Basque system

Imbalance between taxes the State collects and funds given back

Over the last few months Catalonia and part of its population’s struggle for independence have made world headlines. It has become clear that there are many people in Catalonia who no longer want to be a part of the greater Spanish state. Although the conflict has become prominent recently, the struggle between the autonomous region of Spain and the central government has been ongoing for years.

One of the main bones of contention has been the financial relationship between Catalonia and the Spanish central government. A great number of the Catalan people think that Catalonia contributes too much to the rest of the country, and gets very little in exchange. “Spain robs us” and “we maintain lazy people in the south of Spain” are popular mantras among the Catalan people, as described in this piece by Spanish newspaper El Pais. How accurate are these statements?

Part of the problem is that other regions in Spain, in particular the Basque Country and Navarra, have a much better financial deal with the State. How did this come about? The 1978 Spanish Constitution developed a decentralized government model with high degrees of self-government for the 17 autonomous regions in which the Spanish state is divided. Many consider that the current model is a result of the concern post-Franco political authorities had to satisfy the demands of the two historical territories that had national aspirations: Catalonia and the Basque Country. Thus, a system originally designed for these two regions was extended to the rest of the country, a solution coined “coffee for everyone”. However, due to a historical agreement between the Basque Country and Spain (it dates back to the year 1200, when the Basque territories were incorporated to the Crown of Castile) “los Fueros”, the Basque have developed a system which grants them the ability to collect their entire taxes and pact with the central government the amount they pay for the non-transferred services the state grants them: the military, foreign affairs, etc.

Although the Catalan autonomous government had an opportunity to establish this system during the advent of the new Spanish democracy, Jordi Pujol (the Catalan ex-president) who governed the autonomous region for over 23 years, deemed it unwise to demand a similar system to the Basque one, also considering it impossible that the central government would grant the Basque country such a fiscal deal. Since then, the grievances the Catalan government and people have had with the Spanish model of Finance has greatly shaped the relationship with the central Government. But how does it work exactly?

Who runs, and has to pay for, what

Through this decentralized system the autonomous regions are granted the management of the following competences: organization and investments exclusive to their territory; management of agriculture, tourism and environmental economy in their territory; culture, education and linguistic development; social assistance and public healthcare. Furthermore, the state has also granted some autonomous regions (particularly Catalonia and the Basque Country) the management of security, so that they have their own autonomous police forces. The autonomous regions spend approximately 70% of their annual budget on education, healthcare and social services. In order to manage their own competences, the autonomous regions count on the following resources in their approximate proportion, according to newspaper El Confidencial:

-Transfers from the autonomic finance system from the State: 51%.

-Taxes conceded totally or partially by the State and recharges over State taxes (IVA and IRPF): 17%.

-Economic performance derived from their own patrimony and private law income: 9%.

-The product of their credit operations: 19%.

In general the autonomous region’ income depends approximately a 68% (51% + 17%) on the transfers and taxes conferred to them by the State through the autonomic system of finance, a 19% to their capacity of indebtedness and only a 13% to their own fiscal resources. In other words, the management of social policies, which represent approximately a 70% of the public management the autonomous regions take care of, is almost entirely carried out with the resources they receive from the Autonomic system of Finance, a sum which the autonomous regions cannot determine themselves.

This system, which is applied to the entirety of the Spanish State with the exception of the Basque Country and Navarra, has been in place since 2009. The money, derived from the main taxes IVA (value added tax) and IRPF (personal income tax) which the State collects through its tax agency in all the autonomous regions, is not homogenously distributed among them. Alternatively, other mechanisms are used to establish the amount each autonomous region receives according to their financial needs and their ability to generate income.

In other words, if each autonomous region collected their own main taxes (IVA and IRPF) in terms of the economic activity they are able to generate, and with this income they had to take care of their competence needs and also contribute to the State so that it can also attend its own, fiscal deficits would be generated in the autonomous regions that have the lowest GDP.

Making the rich pay

Thus, the effect that the current Autonomic Finance System (SFE in Spanish) has on the richest autonomous regions is that there is an imbalance between the taxes the State collects in their region when compared to the funds they receive from the SFE. This is what is called the “ordinality principle”, which establishes that the rich autonomous regions pay more in order to balance themselves economically with the poorer regions, but without reversing their income capacity. Thus, the richest autonomous regions suffer an imbalance between what they contribute and the level of investment they receive from the State. The most adversely affected autonomous regions by this system are Madrid, the Balearic Islands and Catalonia, in this order.

Catalonia has been demanding a complete revision of this system over the last decades, aiming at a similar system to that currently held by the Basque Country and Navarra. In 2006, in the negotiation process of the new Autonomous status for Catalonia with the Spanish Central Government (a Socialist government at the time), the Catalan authorities were able to open up the possibility to the creation of a Catalan Taxing authority in charge of collecting and managing the totality of its own taxes as long as this was agreed with the State. However, this possibility was shut down by the Spanish Constitutional Court, which deemed it unconstitutional and unfair with regards to other autonomous regions. Indeed, the gutting by the Spanish Constitutional Court of this premise and others that had been established by the new autonomous statute was one of the main factors that triggered a huge rise in support for independence in Catalonia.

What Catalonia has demanded over the last years is a transition from its current multilateral finance system (in which it has to deal with the system of all the other autonomous regions) to a bilateral relationship such as the Basque Country enjoys. It is important to highlight that the Spanish state would suffer from Catalonia’s transition to a finance system similar to the Basque one, for Catalonia represents close to a 20% of the total Spanish GDP.

Is this fair? If one regards the Basque finance system and its advantageous prerogatives, it is not. However, when the systems other wealthy autonomous regions have in the country (such as Madrid, the Balearic Islands and the Valencian Autonomous Region) are considered, Catalonia has a very similar status.

Carlos Rullan co-authored this article. He is a reputed Mallorcan economist and member of the civil society platform Cercle d’Economia.

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